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There may be some good news in store for the rand

Investors are providing crucial support for the rand at a time when emerging-market assets are under pressure from rising US rates

05 October 2018 - 14:10
Colleen Goko

Picture: UFUK ZIVANA

There’s no place left to run for South African investors who want to diversify away from the country’s ailing economy — and that may be good news for the rand, according to the top forecaster of the currency against the dollar.

SA increased limits on the amounts institutions may invest offshore by five percentage points in February, to 40% for fund managers and 30% for pension funds. Most investors are at or close to those levels, providing crucial support for the rand at a time when emerging-market assets are under pressure from rising US rates, according to Absa strategist Mike Keenan.

“That will cap the rand weakness,” said Keenan, who predicts the currency will end the year about 2.5% stronger at R14.25 per dollar. Absa was the most accurate forecaster of the rand versus the dollar in the third quarter, according to data compiled by Bloomberg.

The rand has slumped 19% since the beginning of April amid an emerging-market sell-off sparked by rising US rates and a stronger dollar, and fuelled by crises from Turkey to Argentina.

The economy sank into a recession in the first half, raising concern that tax revenue will lag government forecasts and strain fiscal targets. Political uncertainty surrounding land reform and mining rules also unnerved some investors.

“Our view also takes into account SA’s weak growth backdrop and the inflation cycle, as well as the challenging global environment,” Keenan said. Other risks to his forecast are rising US rates and an escalation in the US-China trade war, with SA’s reliance on commodity exports making it particularly susceptible to a slowdown in global growth, he said.

The rand gained 0.7% Thursday to R14.7665 per dollar, after declining for four straight days as US treasury yields climbed to the highest level since 2011. With foreign investors holding about 40% of government bonds, even after dumping R55.7bn worth of the debt in 2018, SA is vulnerable to capital flight as higher US rates attract money to the dollar.

The odds on the rand reaching Keenan’s target of R14.25 by year-end are 73%, according to Bloomberg calculations based on the price of options to buy and sell the currency.